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Mining services - mind the funding gap: Gearing ratios and capex - EY - Global

Mining services: mind the funding gap

Gearing ratios and capex

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Mining services industry revenue and mining industry capex

Mining services industry revenue and mining industry capex


Gearing in the mining services industry remains high relative to the mining industry.

The mining sector is faced with renewed uncertainty because of volatile bulk commodity prices, rising operating costs and suspension of discretionary capex expansions.

Increase in debt/equity ratios

Gearing has increased recently, driven by falling equity prices:

  • Equipment providers D/Em ratios exceed 40% at June 2012 and D/Eb ratios exceeded 50%.
  • Non-equipment D/Em ratios, without the requirement to fund hard assets, are lower at 27%.
  • D/Em ratios have increased recently, following declines in mining services equity values.
  • D/Em of the broader ASX top 100 mining companies are comparatively lower at 17% (D/Eb of 35%).
  • Mining services companies with market cap between $500m–$1b have D/Em ratios of c.33% (D/Eb of c.49%).
  • Interest coverage ratios (EBITDA/interest expense) for equipment providers at below 6 times are considerably lower than non-equipment providers.

Debt/equity ratio — June 2012

Debt/equity ratio — June 2012

Capex spend to rise

The Australian Bureau of Statistics (ABS) forecasts mining capex spend to increase 45% in FY13 — although outlook is softening.

The revenue and capex spend of the mining services sector is highly correlated with mining industry capex. In FY12, mining capex exceeded mining services revenue, and ranged from 66% to 104% from FY09 to FY12.

Mining services industry revenue
and mining industry capex

Mining services industry revenue and mining industry capex

Mining services revenue could reach $114.5b in FY13, based on the ratio of mining capex to mining services FY12 revenue, and the ABS forecast. Balance sheet structures will have to expand to accommodate additional working capital and property, plant and equipment (P, P&E) to underpin the revenue.

Mining services capex has historically averaged 11–15% of mining company capex. Based on the ABS growth rate of 45%, an estimated $18b of mining services capex will be required in FY13.

Although the capex outlook has recently softened, it is unlikely to impact FY13 capex for committed projects under construction.



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